Recently, I came across an eye-opening report from respected financial academics. This revealed that from 1987 to 2020, UK value stocks underperformed their growth equivalents. For investors in the FTSE 100 and FTSE 250, the best returns came from buying growth companies, rather than undervalued businesses.
Growth versus value
In fact, for at least 15 years, the smart move has been to buy exciting US stocks, rather than boring British shares. After all, American corporate capitalism has delivered superior returns to investors for decades. But could this tide be turning?
The US stock market looks expensive to me today. The S&P 500 index trades on 23.9 times trailing earnings, well above its long-term average. The index’s dividend yield is just 1.3% a year as American corporations prefer to reinvest profits into growth.
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Meanwhile, outside of major market meltdowns, the FTSE 100 has rarely offered such value. It trades on 14.6 times earnings with a dividend yield of 3.6% a year — among the highest of leading stock markets.
The FTSE 100 jumps ahead
The S&P 500 has kicked the FTSE 100’s behind. Over five years, the former has doubled (up 100.3%), while the Footsie recorded a 36.3% gain. Over one year, the results are 16.1% and 15.3%, respectively (all figures exclude cash dividends). But notably, this long-term gap has narrowed dramatically over the last 12 months.
As a long-term investor in both countries, I’ve followed these markets for decades. Finally, after years of waiting, there are some early signs that global investors might see deep value in UK shares.
For example, since end-2024, the UK index is up 7.8%, versus 1.2% for its US counterpart. Last month, the S&P 500 declined by 1.4%, while the Nasdaq Composite lost 4%. However, the Footsie ended February in positive territory, up 1.6%.
Another thing to note is that the UK index is just 0.1% below its all-time high hit last month. By contrast, the S&P 500 lies 3.1% below its record high of 19 February, while the Nasdaq index has dropped 6.7% from its 16 December 2024 peak.
Of course, just as one swallow does not a summer make, so one short-term trend isn’t evidence of a seismic shift. Even so, it’s nice to see the Footsie enjoying its day in the sun!
Once cheap FTSE 250 stock?
But it’s important to remember that investing in UK shares isn’t only about the FTSE 100. Sticking to my value-investing roots, I’ve been looking at the FTSE 250 and see shares in ITV (LSE: ITV) as undervalued, perhaps even triggering a takeover bid?
Founded in 1955, ITV is the UK’s leading commercial terrestrial broadcaster, while ITV Studios sells content worldwide. While core revenue from TV advertising struggles to grow, ITV’s production, digital and streaming arms are doing well.
On 28 December, the shares closed at 71.1p, valuing the firm below £2.7bn. Despite rising 27.5% over the past 12 months, it’s down 39% over five years.
My wife and I own ITV shares in our family portfolio as a value pick. They trade on just 6.6 times earnings and offer a cash yield of 7% a year. Of course, ITV has to compete with global streaming services for eyeballs, leading to declining audiences. Even so, I view it as a solid long-term hold for us.
